Milling & Baking News - November 6, 2018 - 15

Financial Results

Kellogg's co-packing costs cut
into quarterly operating profit
BATTLE CREEK, MICH. - The Kellogg Co. continues to see sales growth
opportunity in single-serve, on-the-go
packaging formats, even after investing in the formats reduced third-quarter operating profit.
The Battle Creek-based company in
the quarter ended Sept. 29 reported operating profit of $396 million, up 19%
from $333 million in the previous year's
third quarter due principally to lower
restructuring charges and favorable
mark-to-market impacts year-on-year.
Adjusted operating profit, however,
was $471 million, down 4% from $490
million primarily because of a planned
increase in advertising and promotion
investment and higher distribution
costs, much of it related to growth in
new pack formats that are co-packed.
Kellogg reported its third-quarter financial numbers on Oct. 31, the same
day its share price closed at $65.48 per
share on the New York Stock Exchange,
down almost 9% from the closing price
of $71.86 on Oct. 30. Steven A. Cahillane,
president and chief executive officer of
Kellogg, was asked about the falling
share price in an Oct. 31 earnings call.
"I don't know what the market is
doing, but we don't manage the stock
price on a day-to-day basis," he said.
"We manage the long-term health and
growth of this business as if we were
owners in it, and the most important
thing that we can do for this business
is return it to top-line growth in a responsible and sustainable way."
The single-serve, on-the-go packaging formats feature such brands as Pringles and Cheez-It as well as multipacks.
"In developed markets, this includes
immediate consumption offerings and
multipacks," said Fareed A. Khan, senior vice-president and chief financial
officer. "In emerging markets, this includes single-serve sachets with more
affordable price points. Both are important opportunities for future growth.
"Leaning into occasions, we developed and expanded these pack formats
across the breadth of our portfolio for
various channels, particularly in our
U.S. Snacks business where on the go is
now running at more than 10% of sales.
The good news is that demand is strong.
You can see it in the scanner data where
our on-the-go offerings are growing
rapidly, and the growth has accelerated
faster than we had anticipated."
Mr. Khan said that because of capacity constraints on existing pack
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formats, Kellogg has relied on copackers for the new pack formats.
"Obviously, co-packing costs money as does the related movement of
product, particularly in a high freight
cost environment," he said. "So while
we lack the incremental growth these
pack formats bring us, they do represent a cost and margin headwind for
us in the near term.
"We do have plans in place to address this for the medium term. As I

KELLOGG CO.

mentioned last quarter, we are investing in in-house packing capabilities
for some of these pack formats, which
will reduce manufacturing costs and
transportation needs, but this will take
a few quarters to get fully ramped up."
Kellogg in the quarter posted net
income of $380 million, or $1.10 per
share on the common stock, which
was up 32% from $288 million, or 83c
per share, in the previous year's third
quarter. Lifting earnings in the quarter were mark-to-market adjustments
and a one-time income tax adjustment
for provisional estimates related to the
adoption of U.S. tax reform.
Net sales in the quarter reached
$3,469 million, up 7% from $3,246 million primarily because of the RXBAR
acquisition in October 2017 and the
consolidation of Nigerian distributor
Multipro in May of this year. Organic
net sales were up 0.4%.
Kellogg updated its financial guidance for the fiscal year. The company
expects net sales growth of about 5%
on a currency-neutral basis, which is
at the high end of the previous range
of 4% to 5%. Guidance on adjusted operating profit was reduced to roughly
flat on a currency-neutral basis, down
from a previous range of 5% to 7%.
Kellogg reduced fiscal-year growth
in adjusted earnings per share to 7%

to 8%, down from a previous range of
11% to 13% because of the reduction
in adjusted operating profit guidance.
In North America in the third quarter, Kellogg posted net sales of $2,188
million, up 1.1% from $2,163 million.
Organic net sales were down modestly
because of the list-price adjustment and
the rationalization of stock-keeping
units related to last year's transition out
of direct-store delivery in U.S. Snacks.
"The impact of our D.S.D. exit was
much smaller in Q3 than it has been in
recent quarters as we lapped the yearago exit during the quarter," Mr. Khan
said. "So that's now behind us in Q4."
In U.S. Snacks, third-quarter sales
of $737 million were down 3.5% from
$764 million. Consumption data
showed improvement in U.S. Snacks,
Mr. Cahillane said.
"Led by our Cheez-It and Club
brands, our crackers consumption
growth accelerated, resulting in a solid share gain in the quarter," he said.
"Pringles also accelerated its growth,
continuing to gain share in salty
snacks. In wholesome snacks, Rice
Krispies Treats continues to gain share,
even with supply constraints, and in
cookies, resumed investment support
behind Keebler Fudge Shoppe, Keebler
brands, Mother's and Famous Amos
is bringing these key brands back into
consumption and share growth, stabilizing our share overall."
RXBAR contributed almost 14 percentage points to net sales growth in
North American Other, which is comprised of U.S. frozen foods, Kashi, RXBAR and Canadian businesses. Thirdquarter sales of $483 million in North
American Other were up 15% from
$419 million.
In U.S. Morning Foods, third-quarter
sales of $683 million were down 1.3%
from $692 million. The June recall of
Honey Smacks cereal affected cereal
consumption and share (see related
story on Page 12). Third-quarter sales
in U.S. Specialty Channels were $285
million, down 1.3% from $288 million.
Also in the third quarter, sales
slipped 0.5% to $596 million in Europe and 1.4% to $239 million in Latin
America. Sales rose 79% to $446 million in Asia Pacific because of the consolidation of results from Multipro.
Kellogg companywide in the first
nine months posted net income of
$1,420 million, or $4.10 per share on
the common stock, which was up 70%
from $837 million, or $2.40 per share,
in the same time of the previous year.
Net sales of $10,230 million were up
6% from $9,669 million. MBN
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November 6, 2018 / 15

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Milling & Baking News - November 6, 2018

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